With the London Stock Exchange having just announced that trades on Sets, its electronic order book, topped 508,000 per day in March 2007 and were 76 per cent up over the same month in 2006, many might say the prospects for alternative trading destinations in Europe appeared less than lucrative. Others might argue the LSE is ruthlessly milking its users.
Instinet Chi-X, which is operating as an alternative trading system (ATS) in advance of the Markets in Financial Instrument Directive (MiFID) and will be authorised post MIFID’s November deadline as a multilateral trading facility (MTF), is seeking a low cost, high capacity and super low latency solution for institutional investors. Around 7500 pan-European equities are offered.
Peter Randall, director head of business development at Instinet Chi-X, an independent subsidiary of Instinet Europe (the broker), is a “fervent believer” that what Europe’s securities landscape desperately needs is not further exchange consolidation.
Need for competition
“The very reason we have initiated Chi-X is that European securities landscape really needs competition. Logically one can consolidate and consolidate to just end up with a European-wide monopoly. But ultimately is that going to benefit European trading, clearing and settlement? I don’t think so.”
A glance at the touted key benefits of Chi-X, which derives its name from the Greek word for cross (chi) and trader speak (doing the Greeks), should make many within the buy-side fraternity take serious note.
The newly built matching engine and limit order book with ‘micro-second’ performance claims a speed 10 times faster than major European exchange order driven systems as well as being at least 90 per cent cheaper.
Built on scaleable low-cost hardware that resides on the Linux operating system - with no throttle or ‘brown out’ - Instinet Chi-X’s internal benchmarking statistics show a core cash equity system order flow capacity (messages per second) of 10,000. That compares with 600 transactions per second (TPS) on the LSE and 65 on virt-x.
Mr Randall, who worked for James Capel and BZW before joining Instinet back in around 1992, explains that in terms of the trading tariffs on the network system, Chi-X will offer a 0.20 basis points rebate for passive execution (0.30 basis points for aggressive execution).
According to Instinet Europe’s internal statistics based on average daily direct market access DMA trades, volume and consideration, Chi-X the venue will charge just 0.05 basis points compared to 0.50 basis points, 0.51 basis points and 0.57 basis points on Euronext Paris, the LSE and Deutsche Boerse Xetra platforms, respectively.
And, on the trade reporting front too there could be considerable savings with their £210 (c.€300) maximum monthly reporting costs. This compares with the LSE’s recent maximum £2.75 per trade report and virt-x’s £2100 monthly minimum activity charge and its 10p per trade report on its high volume service.
In respect of market data, the per annum licence fee associated with redistributors of domestic data on a per workstation basis is zero on Chi-X, compared with £44,000 with the LSE and €36,750 at Euronext.
Mr Randall adds Chi-X’s trade reporting fees are for “aspects” of reporting. “However, overarching our philosophy and objective is that we don’t believe that we should be making money out of anything other than trading. It’s a necessary ancillary requirement.”
The game plan over the next 12 months is to provide a “cost-effective solution” to the problems raised by European trading, clearing and settlement. Yet is there a benchmark to know when the initiative will have worked?
“Clearly there is a benchmark, although the early indications are this is going very well. We’re well on the way to achieving what we need to achieve to make Chi-X self-sustaining,” Mr Randall told FT Mandate in early April.
While not divulging the extent of market share in Europe that the management team in London’s Canary Wharf offices would be seeking, Hirander Misra, director and head of product development at Instinet Chi-X says that “momentum” has been building up on the client side in the months leading up to MiFID’s deadline. Some think the platform could get significant market share.
Market reaction
Further testing of systems and familiarity with market data is being undertaken by on-boarded and new clients. In more specific terms on the market reaction to the value proposition of Chi-X, its head of business development claims: “Increasingly large numbers of them [market participants] are starting to connect to us and starting to undertake the work to do the connection.” Indeed, sources indicate that Chi-X witnessed a record trading day this March.
No named institutions have been revealed at this stage, although Instinet, the broker has been channelling flows through Chi-X as client since last year during the trading network’s beta production.
Mr Randall believes Chi-X could well enjoy a “significant market share” in a relatively short period. Citing the Christine Keeler defence from the 1960s, he says the major European exchanges like the LSE might well argue that they provide a clear service and clear price, but that they also charge too much for those services.
Mr Misra explains that the beta production ‘live’ phase with Instinet flows going through Chi-X system has resulted in trades are being executed as a result. An MoU signed between Instinet and Fortis last October to co-operate to develop a clearing and settlement service for Chi-X.
“From 30 March 2007, Fortis comes on board with a centrally-cleared service offering a fully anonymous market, initially with Dutch and German equities and subsequently UK equities during this second quarter,” states Mr Misra. “This is our pilot phase whereby various different clients are at different stages of connectivity and on boarding with the system.”
